Nivi · September 26th, 2008
A few days ago, I posted a video where fellow Venture Hacker Naval Ravikant answers the age-old question:
What do you look for in a startup?
I liked his answer and transcribed/paraphrased it below:
(Video: Interview with Naval Ravikant.)
“There’s no silver bullet or magic answer but I actually do have a set of criteria I’ve come up with based on my own startups, after looking back on what worked.
“I look for two things that are paramount above all:
- Great team. It’s obvious. It’s a tautology. Everybody says it. You have to be working with some of the best people in the industry you’re in.
- Huge market. Niche markets just don’t work because the first idea never works. You always have to change the idea, so you need room to maneuver in a big market.
“There are three more factors that I look at. Not all three of them are required but I prefer a company to have at least two of them:
- Difficult technology that is compounding over time.
- A proprietary distribution channel. A clever viral marketing, or SEO, or partnership, or whatever strategy that gives them a leg up over competitors.
- A direct monetization model. Something more than throwing up 10 cent banner ad CPMs.
“There’s a small number of companies that are very good and very qualified and they get an embarrassingly large number of offers. And there’s a large number of companies that miss on one or two of these dimensions and they pound the fund-raising pavement and don’t get anything.
“This makes sense when you think about it because this is a hit-driven business: a small number of companies account for all the returns. So when people recognize what they think is a winning company, they will pay almost anything and they will do almost anything to invest in that company. And when they look at what they think is a non-winning company, they just say “bye”.
“It’s very similar to Hollywood where there are a few blockbusters and a lot of indie films made. Everyone’s got a camera but odds are you have an indie film. So go back to these five criteria and think about your blockbuster.”
My criteria are a little different. Yes, you need a great team in a big market (preferably, the team has years of experience with their customer).
The only other thing I look for is an amazing product. What makes a product amazing? You know it when you see it. The founders must be chasing a big vision with a beautiful product that is going to make a dent in the universe.
A great product automatically satisifies the technology, distribution, and monetization criteria. Great products are always hard to build. Grafting distribution onto something that isn’t great is a band-aid and a waste of time. It might work, but who wants to spend their lives doing it? Finally, a great product in a big market will either make a lot of money or shrink the market.
Knowing these criteria is one thing. Applying them effectively is another; I hope to learn how someday. It takes practice, diversification, and an aesthetic sensibility.
Topics Investment Criteria